BiggerPockets Money Podcast

BiggerPockets Money Podcast 86: Choosing the Right Investment Type for Your Goals with David Stein

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David Stein reached out to us after Erin Lowry’s episode, No. 81, where we talked about the basics of investing. He really liked that episode and wanted to dive a little further into the different types of investments you can choose from.

In this episode, we explore asset classes we haven’t really discussed before: closed end mutual funds, REITs, mortgage REITs, and different types of stock. (Yes, there are more than one!) We even touch on gold and cryptocurrency!

Investing isn’t limited to stocks, bonds, and real estate, and David introduces these ideas so you can start investigating the asset classes that appeal to you. His advice will inform what works best for your financial goals.

David also shares his investing principles and a top tip so simple yet SO excellent: Be able to describe in detail what you are investing in. If you can’t, you’re not ready to invest in that just yet.

If you’re looking for different asset classes, for better returns, or to diversify your portfolio, this episode is a must-listen!

Click here to listen on iTunes.

Listen to the Podcast Here

Read the Transcript Here

Scott: Welcome to the BiggerPockets Money Podcast, show number 86, with David Stein from Money For the Rest of Us.

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Narrator: It’s time for a new American Dream. One that doesn’t involve working in a cubicle for 40 years, barely scraping by. Whether you’re looking to get your financial health in order, invest the money you already have, or discover new paths for wealth creation, you’re in the right place. This show is for anyone who has money, or wants more. This is the BiggerPockets Money Podcast.

Scott: How’s it going, everybody? I’m Scott Trench, and I’m here with my co-host, miss Mindy Jensen. How you doing today, Mindy?

Mindy: Scott, I am having a lovely day today. How are you doing today?

Scott: I’m doing great. We just had a wonderful discussion with David, who is clearly an incredibly sophisticated, smart investor. Who really has a good, solid, intellectual basis for what he’s doing and why.

Mindy: Yes. David reached out to me a few weeks after Erin Lowry… Did I say her name right? I always mess it up now. A few weeks after Erin Lowry’s episode, where she was explaining the basics of investing, and he said, “That’s great. I love her book. I recommend her book. But how do you know how to choose what kind of investment to even start with? I think that would make a great show.”
I’m like, “Hey, I agree with you. I think that would make an awesome show.” So, we connected. Now he’s here today to talk about different ways to invest and let you make decisions, informed decisions, once you have all the facts.

Scott: Yeah. Shout out to that episode with Erin Lowry. Virginia, my girlfriend, said that’s one of her favorites. She got a lot out of that.
So, if you, or someone you know, is still learning about investing and needs an intro, that might be a great one to dive into. Then follow up, right away, with this episode, which is maybe more higher level, more advanced, maybe the discussion today, than with Erin.

Mindy: Yes. Erin’s episode is episode 81, so you can find that wherever podcasts are. Or at biggerpockets.com/moneyshow81.

Scott: All right. Well, shall we bring in David and get going?

Mindy: David Stein, welcome to the BiggerPockets Money Podcast. How’s it going today?

David: I’m wonderful, thanks.

Mindy: Can you walk us through where your journey with money begins?

David: For sure. I grew up in Ohio, and I was a single-family household. My parents had divorced when I was young. My first experience with money was not having very much, at all. Probably the first time I realized we didn’t have anything was, we’d get food delivers, we had food stamps, and welfare.
It was just the fear that my mother had, because she was always trying to figure out how to make money. I mean, she did all kinds of stuff. She sold real estate back when interest rates, mortgage rates, were 15%, right? So, that didn’t go too well. She made dolls. She cleaned houses.
And so, growing up, I wanted to have money. We had a house. It’s not like we were on the streets. My mother always said, “You know, if we didn’t have that house, we would be on the streets.” But we had that.
I was probably about 10 or 11, I was reading the newspaper, Cincinnati Enquirer, I was a big Reds fan, and there was a full-page ad for this guy had a motorhome. He’s like, “You can make a hundred-thousand dollars a year. You can have a motorhome and travel all around the country,” this was sort of the late ’70s, “And I’ll show you how.”
I convinced my mother to buy this thing. I didn’t know what it was. It’s just this secret. Now, I think she was interested, and I was interested, and it ended up being basically books on how to do advertising. From there, I started to launch businesses from, really, a young age.
So, that’s kind of where the story of money began. Realizing we didn’t have enough, and that the way to solve that was to figure out how to run businesses.

Mindy: What sort of powers of persuasion do you have that allowed you to convince your mom to buy a motorhome when you were 10? I mean, that’s really impressive.

David: I don’t think it was my persuasion. I think it was the copywriter of that full page Cincinnati Enquirer ad. I showed it to her. She read it. I read it. Maybe, I don’t know. I mean, it’s probably… It might have been over $100. Then he sent me these books, most of which I didn’t really understand. But it was like, “Oh, I could solve this problem in my life and not wait for somebody else to solve it.”
That resulted in a series of mostly failed businesses. I mean, back then there was no internet. I’m running ads in the classified of doing handwriting analysis. I’m washing windows. I mean, there’s a combination. But surprisingly, most of it was information products. I offered to do research services. Generally speaking, nobody bought anything, which means I wasn’t a very good copywriter. But that desire to control my own money destiny never really left.

Scott: Did anything of this work out? Or what was the position that you maybe left high school or entered the next phase of your life in?

David: I got experience. So I mean, that worked out, but no. I mean, the things that worked out best were the things where I was trading time for money. I was washing windows. But things that leveraged information products, they didn’t really work out in high school.
But again, I’m in high school. After a high school, I actually worked for a year washing dishes at a hotel, which was also very eye-opening, because that was, again, time for money. Eventually went to college. I studied finance. What I found interesting, I remember going to college, and introduction business…
I didn’t give a whole lot of thought to college. I thought, “I want a job. I’ll study business because businesses give jobs.” They had introductory speakers, and a stockbroker stood up and said that he made a hundred-thousand dollars a year. So, kind of hear that six-figure number again. I’ll study finance. Fortunately, I actually liked aspects of finance. That’s how I eventually ended up in the investing business, and learned to actually manage money professionally that way.

Scott: What was your financial position upon graduating college? Did you take on student loan debt? Were you able to get a job that immediately paid you pretty well? What did that look like?

David: Well, I worked all through college. I went to the University of Cincinnati Undergrad. I went to Miami University Graduate School. We, I guess fortunate enough, we were poor enough, and there will still grants, so much of it was grants. There were scholarships. But I left school with about 10 grand in loans after graduate school, which wasn’t bad.
My in-laws helped. My father-in-law said, “Here’s 10 grand. Go to graduate school now.” I went to graduate school with six kids and you don’t want to do that, so just go now. And so, that helped. But at the end of the day, yeah. Then I got a job. I mean, I didn’t know anything. I graduated with an MBA, I went to the placement office, and I got a job to basically do credit analysis.
It’s very different. My kids now want to get jobs. It’s very, very different. My jobs, I had two jobs adult life. One I got from the placement office. The second, the investment firm I joined, I answered a classified ad and stayed there 17 years. Then, my third job is what I do now. I’m not the person to go to for how to get job advice because I did it the traditional way.

Scott: No, absolutely. So what was your approach to money with this first job? At that second job? What were the milestones in terms of changing your thinking around money over this part of your career?
Were you consistently saving? Was there an ah-ha moment where you stepped on the gas? Did you take on any more debt? What was your approach to money throughout this portion of your career?

David: Well, in the early years we made mistakes like a lot of people did. Got into debt with cars. With health. Like, health club type thing. So, we had consumer debt. I spent three years in corporate, and then I went to this small 25-person investment advisory firm. There, I spent a lot of time… I took a pretty big pay cut. I wanted to go into investing so badly that I took about a 50% pay cut to join this investment firm. But they promised double-digit raises over time.
Really, I learned more about money spending a lot of time with investment managers. Looking at how they researched stocks. Look at hedge funds. Just observing. A lot of it was just observing how. I worked with a lot of not-for-profit boards and observed how the wealthy react to money. How they act around money. What do they do in terms of money. And that they’re not these stuffy rich people, they’re actually very giving people. They’re just giving their time and their money to causes.
Ultimately, we got out of the hole because we increased our income. I became a partner at our firm. And so, it was not the fire movement where they’re saving 40, 50%. We didn’t do that. Ultimately, I’d been with my firm maybe five years. I was a partner, and we sold it. Then three years later, we bought it back at half the price and took on a bunch of leverage. That worked out. Then I got to the point… I was in my mid forties. I hit my number that I could retire, and so I quit. That’s been seven years ago.

Scott: That’s awesome. What it sounds to me like is you took a big risk in joining this firm. Then got on on the ground floor, and then helped grow it, and really intrinsically understood the value of business, as well, along with the other partners. That was, perhaps, a primary driver in the creation of a lot of, maybe, your net worth over that period of time. Is that right?

David: Yeah, that’s true. I mean, it might not seem like a big risk now. But at the time, I was working for AT&T Capital. It was a big corporation, and you’re climbing the career ladder. The idea of joining a 25-person firm, at least to me, that come from kind of a traditional mindset of, “Why would you do that?”
I remember reading an article by the management guru Peter Drucker. He talked about gazelles versus, I think it was elephants, right? And that a gazelle is going to run faster and you’re going to get way more opportunities. And so, that convinced me. I’d be willing to take that cut and try this, and I quickly found that.
You realize in business, many people they don’t want to share their ideas, they don’t have ideas, and that people that share ideas and they want to create value, they get rewarded. Especially with a small company where people can see. I mean, there’s not that many people. They can see when you’re adding value. Ultimately, that helped. Then we took another big risk when we signed personal guarantees to borrow a bunch of money, millions of dollars, to buy back our company.
There’s always some luck involved, too. In terms of what I did there, I launched an asset managed product that did very well. That became close to a third of our firm’s revenue. So, there were things that worked out along the way. It was being aware and taking advantage of opportunities that did show up.

Scott: All right. I mean, it sounds like a wonderful career here. What prompts the decision to retire and go to the… What was your thought process in moving away from traditional employment, and your career with this firm?

David: Well, I remember, this was probably 2011, and we were having an annual client conference. I was speaking. I was one of our keynote speakers. I remember giving my speech, and when I give a speech, sometimes you have basically your voice in your head is chattering to you as you give your speech, and it basically said, “You’ve topped out at this firm.”
Like, “All right. You’re already the keynote speaker at your client conferences. There’s hundreds of people there. You’re giving a speech. What are you going to do now?” I could just keep doing what I was doing and wait out the clock and do a traditional retirement. But my biggest fear is that what if somebody sued us? Or something bad happened.
I knew what my value was, because we had an operating agreement. It was stressful to manage money. To be compared against a benchmark every week and try to outperform. I just got to the point where I remember I was just giving a speech in California, and I saw our numbers for that particular week. The performance, it wasn’t good. That might have… We were having a tough year, and I thought, “You know, I’m done.” I know what it’s worth. I talked to my wife, [Lopearl 00:13:45], I was like, and she was always very supportive of quitting. Like, “Yeah, go do it. I mean, you’ve talked about this for years. Just go do it.”
I booked a red-eye flight, and I showed up at our weekly [inaudible 00:13:56]committee meeting and I told them I was done. I mean, I didn’t know what I was going to do. I just knew that in my mid-forties, I didn’t want to do what I was doing for another 20 years.

Scott: Got it.

Mindy: How long were you retired before you jumped back into the workforce?

David: Well, we told our clients I was retired. But the reality is, I launched a website on a plane coming back from my retirement party. The problem was, I launched an investment newsletter, an investment site, and I hated it. Basically I had recreated my same job, but I wasn’t getting paid. I found that I was afraid somebody would hire me, or… I wasn’t even an investment advisor, I just didn’t know what else to do. I literally launched that.
And that went on for two years. Starting stuff, shutting it down. I think I probably started and shut down five different websites over a two year period. Just because I never got comfortable.
I knew I wanted to… I get tired of saying we as an investment advisor, right? We think this. We think that. I wanted to say me. But still saying me, I think this, was still a little terrifying. It took me a little while to get used to that, and to figure out a way how I wanted to do it. Finally, it was probably early 2014, I started writing a regular investment column for a personal finance column for a local newspaper.
I became guest on a podcast, Matt and Andrew’s podcast, Listen Money Matters. They had me on. I didn’t know who they were. I was a guest. We talked, and I thought, “That was kind of fun.” I missed the teaching aspect of investing. And so, it was probably a few weeks after that, I launched my podcast, Money For the Rest of Us. Just try it out. I didn’t know what it would be like. And I found I enjoyed it.
From there, I learned I liked the teaching. That’s what I do now. I teach through video, audio, and writing.

Mindy: Okay. So, Money For the Rest of Us. Who are the rest of us?

David: That-

Mindy: Who are we excluding?

David: It’s not defined. Bernadette Jiwa, she’s the branding expert that came up with the name back in 2014. She’s like, “You should write a book. Here’s what you should call it.” And that was my question to her, “Who’s the the rest of us?” And she said, “It’s how people interpret it.”
In my mind, it’s us. It’s individual investors. It’s not Wall Street. It’s people that are trying to learn how to invest. To be better investors. To be better at personal finance. That’s the rest of us.
And so, I guess you could say we’re excluding the hedge funds out there. The Wall Street firms. Not that they’re necessarily bad people, but they’re not us. They have much better resources. They’ve quantitative algorithms. They have bots. I mean, they invest very differently than how an individual should invest.

Scott: Got it. Would you say that your advice is mostly tailored to folks that have something to invest? Let’s call it like ten thousand-ish or more to begin investing, or is it even with the first dollar that you’re really-

David: Oh, no. I think it’s with the first dollar. I mean, I did an episode on how to invest $100. Because I mean, now fortunately, you can buy an ETF without paying any commission. Or commissions are very low.
There’s apps out there you can use to start investing. It’s very much the same principle, whether you’re investing a dollar, or whether you’re investing a million dollars. It’s the same investment principles. That’s what I teach. I try to teach them principles.

Scott: Awesome. What are some of those principles? What are the things I should think about if I’m thinking about taking control and investing my own money with total control?

David: Well, the first thing you should ask yourself… Whenever you invest in anything, you should be able to answer the question, “What is it?” You should be able to describe, in detail, if you were talking to a friend. I had a college client, one of my first endowment clients, he told me, he says, “I’m not comfortable investing in anything that I cannot explain to somebody that’s not on our investment committee. So, if I cannot explain it, then we shouldn’t invest.”
The process of explaining an investment, it keeps us humble. They’ve done academic studies on that. When they ask people to explain something as simple as a zipper… How does a zipper work? They find it’s very difficult to do. We think we know more than we do. And so, I find it that beginning investors get in trouble because they go into an area and have no idea how it works.
I mean, trading. Right? I was talking to, at a conference this past weekend, and I was talking to one of these online platforms. They said the number one course that’s selling on their platform is on trading securities, right? Which dumbfounds me, because if… Where else, other than I see poker, because I’ve asked this before, can you pick up a tennis racket and start playing with professionals? That’s what trading is. You’re trading against professionals.
So the first thing you should ask is, “What is?” Be able to explain it. From there, another question should be like, “Who am I competing against? Whose on the other side of the trade?”
If you’re buying a car, you know who’s selling you the car, typically. You know what their motivation is. But with many investment… Or real estate, right? Typically, you have some idea who’s selling you the real estate, or why. Are they highly motivated? If they’re highly motivated, you can get a better price.
But many investments, people go in, they buy a stock, they buy a cryptocurrency, they have no idea. They don’t really think, “Why is that person selling that to me? Or who is selling that to me?” When it comes to individual stocks, it’s typically an institutional investor that’s running an algorithm. Which means they’re going to know so much more about this company, and it’s correct price, than we would in buying it.

Scott: Yeah. I think those are two great questions. I think that a natural problem that is kind of come in to my mind from that is suppose I’m new to investing, those seem like huge rabbit holes to go down. Even to just understand what one company, in all of the companies in the stock market, does and how they make money and all of that kind of stuff. And then to figure out who on the other side of the equation is.
Is there an introduction or guide that you can give us of how to very simply go about those if I’m just trying to get started with my first couple hundred?

David: All right. Yeah. First, don’t buy individual stocks. Go to your 401k and look what the options available, if you have a 401k. What is this fund? You read the material. Because I don’t buy individual stocks. As individuals, we should focus on asset classes, which are basically baskets of securities that create a return.
Because one of the things that we want to step back and ask is, “Is this opportunity, is this an investment? Is this speculation? Or is this gambling?” The difference is the expected return. Real estate’s an investment, and why? Because it has income, right? As a beginner, we know we can look at some things, say, “Does this have a dividend? Am I going to get some income out of that?” That’s an investment.
A speculation is where you have to be precisely right and there’s some disagreement whether the return is going to be positive or negative. Bitcoin’s a speculation. There’s no income to Bitcoin. It’s just it’s going to go up, or it’s going to go down, based on whether people will buy it.
Then you have gambles, which has a negative expected return because we know so little about it, let’s say, and we get taken advantage of. So we lose. A lot of trading is like that.
We can start simply by focusing on what are the opportunities in your 401k? What is that basket of security? What is that asset class? I mean, you can invest with two ETFs. You can buy the VT. You can buy the Vanguard Total Global Stock Market ETF. You can buy the bond version. That’s how you start.

Scott: One of the things… I also invest almost exclusively in index funds. And stocks and real estate as my two major asset classes. For a lot of these reasons. I wouldn’t have articulated them like this before talking to you, but I love these concepts.
When I invest in an index fund, I am investing in a broad set of companies. I’m investing in a huge portion of the public marketplace. I don’t have to know what each of those companies does, and what they’re doing, to answer, I think, satisfactorily the question, “What is it? What is the ETF? What is the thing I’m investing in?”
And who is on the other side of that? Well, it’s the entire market of buyers and sellers of securities in the overall, broad US stock market. If I’m buying a broad US stock market ETF or index fund. Right? I’m really avoiding having to do some of the really hard stuff that the professionals are doing on the trading, or gambling, or speculation sides of the piece when I invest. Would you agree with that as an analysis?

David: Oh, absolutely.

Scott: Why that-

David: Yeah. Because you are buying the broad market. For example, you don’t care whether the stocks are priced correctly or not. When you’re buying individual stock, right? There’s some pride there because you’re saying that the market is wrong. That they have priced this stock wrong. Because the value of a stock is basically the value today of all its future earnings. That’s what the market is. The people are transacting and they’re saying, “This company is worth this amount based on our expectations of how it’s going to grow in the future.”
And so, when you buy an individual stock, you’re saying, “They’re wrong. I think it’s going to do better than everybody thinks because if otherwise if it doesn’t do better then it’s not going to outperform.”
So buying an index fund, you don’t have to read the paper anymore. You don’t care about what individual companies are. Because some are going to do better than what people think, and they’re the ones that are going to appreciate a bunch. Some are going to do worse than what people had priced in, and they’re going to do worse. Overall, that cancels each other out and then you benefit by buying an index fund.
What drives the return of an index fund? Let’s say a US index fund. It’s driven by the dividend, the cashflow, and it’s driven by how that dividend grows over time. So, that’s the second thing. Then it’s driven by what’s the value individuals are putting on that. Are they paying more in terms of the price-to-earnings ratio or less? That’s what drives the stock market. That’s what it comes down to.
Being able to explain what an investment is, one of the things you should be able to explain is what drives a return. Well, it’s income, the growth in income, and what people are paying for that income.

Mindy: Are there any circumstances that would make you buy an individual stock or recommend that people that people, oh if this happens, if you see something that would make you recommend buying an individual stock versus an index fund?

David: Just for fun. Sometimes it’s fun, but other than that.

Mindy: I agree.

David: I mean, I test drove a Model 3 Tesla last weekend. This is so cool. I’ve driven them before, but the Model 3, it was just amazing. Like you could see this is going to change how people drive. I thought, “Maybe I should just buy Tesla stock.” Now, a year ago I did an episode on electric cars and I made the case for why not to buy Tesla stock. Then as I went through it again, I stopped myself, saying, “I have no idea idea.” Tesla’s not making any money. There’s risk and…
But sometime… If you bought the Tesla stock and it did well, it’s like yeah, you could tell people, “Yeah, I did well in it.” And it kind of participated it. But Tesla doesn’t even see the money, right? I mean, this is all trading in the secondary market. That’s not money going to them. But for most of us, no.
I mean, you do it maybe for fun. Sometimes you have to learn by doing and realize how hard it is to invest in individual securities, but I spent years trying to identify money managers that could outperform the market. I mean, that’s what we do. We had 20% research group.
And there just aren’t that many. And so, how are we going to do it as an individual?

Scott: Yeah, I find that the stock picking, and this exercise in analyzing a company and seeing if they will do well, is a really good way to motivate, for example, a teenager, or a student, or a very young person that’s just starting their career. College student, or something like that. To get them interested investing in the first place, but I really don’t think it’s a good way to…
It’s not how I manage my money for the long-term in terms of returns because I just don’t think I can outperform these professionals, these traders, who are looking for these undervalues and really honing in on these price points. For exactly the reasons that you’re talking about.
But it can be fun every once in a while, like you said, to buy an individual-

David: Oh, right. There’s so many other asset classes one can learn, right? That’s why if you focus on individual stock… I mean, you can learn about real estate. You can learn about closed-end funds. We don’t necessarily have to talk about today, but there are type of mutual fund that’s extremely inefficient because it’s driven by individuals. Who’s on the other side of a trade with…
A close-end fund is like a mutual fund, but it trades on an exchange and typically sells for discount to the of their assets. And it’s individuals on the other side of a trade there, and they panic. They dump their assets. Then suddenly you can pick up a real estate closed-end fund for the value the property is worth 80 cents on the dollar in terms of the values there.
I mean, there’s all these other asset classes that people that like to invest can learn about. If you don’t like to invest, stick with stocks. Stick with passive real estate. Go on with your life.

Scott: Well, that’s… Oh, go ahead, Mindy.

Mindy: I asked that question because I wanted to hear it from you. A, what I consider to be a money expert, saying, “No, you shouldn’t buy individual stocks unless it’s just for fun.” I will give you one caveat. You should buy one share of Berkshire Hathaway B stock so you can go to the Berkshire Hathaway annual meeting.

David: You could. I mean, you can learn from investing from Warren Buffett. I did an episode recently, should you hire Warren Buffett to manage your money? And I evaluated-

Mindy: Oh, I’d love to.

David: I valuated Berkshire Hathaway as a money manager. So if they were a money manager, what would you look at? At the end, I concluded you would not hire them as a money manager because they don’t have a succession plan, right? They’re very talented, but they’re also very senior. They have a ton of cash that they can’t put to work because they don’t have enough good ideas. They can’t put their money to work in terms of opportunity.
If you were an endowment hiring a money manager, you wouldn’t hire somebody that didn’t have a clear succession plan, and that had too much capacity. In other words, they had too much assets under management that they can’t get it to work. But you can still learn a lot from Warren Buffet in terms of how he goes about it.

Scott: Yeah, I think it’s very interesting. Let’s go into some of these other asset classes that you mentioned that you can get involved in. What is your opinion of considering real estate, for example? Or you mentioned closed and mutual funds. I’ve never heard of that before. Can you give us a list of other areas to maybe consider if you’re interested in more than just index funds investing in the stock-

David: Well, we’ve not talked about bonds. People should own bonds, right? Sometimes people want to save for their house, right? You don’t want to put your down payment money in stocks, or tied up in real estate. People need to understand what bonds are. They’re dead instruments.
For all asset classes, there’s rules of thumb that you can use to figure out what the potential return’s going to be. Every bond, fund or ETF in the US has an SCC yield. Right? It’s basically, it’s a percentage base. Right now the Vanguard Total Bond Market Index Fund has an SCC yield of about two-and-a-half percent. And that is a very good estimate of what that bond fund will return over the next seven years. Right?
I mean, that’s just the way the math works. Because bonds is driven by math. Well, you can buy it cash and earn two-and-half-percent right now. You can buy a very short-term bond fund. You can get a CD. So why would anyone buy the total Vanguard Bond Market Index Fund when you can get the same return just by owning cash?
I mean, the only reason you would do it is because you believe interest rates will fall. Because the way bonds work, the value does fluctuate as interest rates rise and fall. A Vanguard Fund, that one, is just more sensitive to those changes. If you believe rates are going to fall, then you buy that fund.
But rates going up or down, that’s a speculation again. Right? Because you have to be exactly right. You primarily own bonds… I own bonds because I want the income. I care about how much income I’m going to get, and I want the safety of principle because I’m saving it. Or I like the optionality of it. I like to own bonds because someday the stock market is going to fall, and it can fall 50 to 60% percent. I’d like to have some assets that I can rebalance into stocks for.
Bonds is an asset class. Real estate. Most people aren’t going to buy rental real estate. Right? So you learn about real estate investment trusts, which is a… Basically, you can buy a REIT exchange-rated fund, or a REIT index fund that owns hundreds and hundreds of real estate projects around the world. Office buildings, apartments, et cetera. That’s another one. Go ahead.

Scott: Oh, no. Do you invest in REITs or real estate?

David: I do. I do. Most of my real estate expenditure is through REITs. I’ve owned rental real estate in the past, but I found it’s a lot of work. I didn’t like it. I couldn’t find a property manager. And so, I actually, in most of my private real estate, it’s actually debt financing. So, I’ve lent on a 12-plex, for example, to where they’re paying me. I’m basically the bank. I prefer it that way versus actually owning that.
But yeah, I own REITs. If you look at my portfolio, from my membership community, I share everything that I own so they can see here’s my asset mix, here’s the securities I own. I have well over a dozen different asset classes. I own gold as a speculation. I distinguish there’s an investment, it has income and makes positive expected return. Here’s a speculation, where there’s a disagreement. I own artwork.
What you want is a variety of return drivers. Many different things that you don’t have to predict the future, but you benefit as things happen.

Mindy: Let’s go back to a REIT, because BiggerPockets started out as, well started out, it still is, a real estate investing education site. As the market gets hotter and hotter, as real estate investors, or more people start investing in real estate, deals get harder to find. How do you select a REIT? What are you looking for? Where do you buy them? Or invest in them? Or whatever.

David: When I’m talking REITs, I’m talking public. There’s private REITs, and there’s public REITs. So public real estate investment trust. And I don’t select a REIT. A REIT is one company that trades on the stock exchange, and they’re buying… They might have a dozen properties that they own. I’m buying a REIT index fund. So it owns hundreds of REITs. In which case, it owns hundreds of properties.
I mean, Vanguard, I believe, has a REIT index fund. Schwab has a very inexpensive REIT ETF. The Schwab real estate… So, I mean, they just buy it. iShares has REIT exchange-rated funds. And so, you don’t have to be analyzing specific REITs, because they’re buying the overall market.
What drives the returns of REITs, because we want to know what’s the upside? Well, public REITs now have a dividend yield of 4%. That return’s locked in. Then, the overall return over a, let’s say a 10-year holding period, will be driven by that dividend yield and how fast that dividends grow over time. If REITs grow their dividends at 3%, let’s say, then you have a 7% return baked in. Then the third variable would be, are people 10 years from now paying more for REITs in terms of how much they want for their cashflow, or are they paying less? That will influence REIT. So, that’s what I do there.
Now, private REITs… A lot of the crowdfunding platform offer private REITs. I haven’t invested in them, because you mention that the real estates expensive. They tend to have a little higher return because using more leverage, right? Your average public REIT has about 25 to 30% of leverage. A public REIT does. A private REIT uses 50 to 60% leverage, so they’re going to have a higher return because they’re taking on more risk. The problem with private REITs is they’re not liquid. Right? You can’t get out. You basically, you can get a little bit out every quarter, but it’s like a three-year commitment or longer. Typically.
But I think REITs are great way to invest in real estate if you don’t want to go out and buy individual properties. Because you’re right. Right now the capitalization rate, so basically yield on private properties, is as low as it’s ever been. Historically. I mean, it’s not that they’re going to fall in price, but if the yield is that low, it means your expected return is going to be much lower.

Scott: Yeah. And I would say… Look, I’m CEO and President of BiggerPockets here, and I would say that you really shouldn’t invest in real estate privately, in rental properties, unless you expect a return that is significantly greater than what you can get in these other asset classes. Such as a REIT, which is totally passive for you as an investor. Or the stock market. Or bonds. Or whatever other asset classes.
You only invest in real estate if you think you can get substantially higher returns. At least, real estate that you can control, as a rental property. Especially if you’re going to self manage and owner operate. I must get a 15, 17% expected return in average market conditions to invest in real estate personally. Otherwise, it’s just not worth that extra effort. In my opinion.

David: Well, exactly. In fact, my view is that… And they’re hard to find. I mean, back 10, 15 years ago, you could buy a rental property where a cap rate was 10 to 12%. Now the average apartment cap rate is 5. Here at a college town they’re selling for 4. Why would I… If my yield is 4%, and I got all the expenses and all that stuff…
I mean, a lot of times I think people talk themselves into real estate deals because they factor in the leverage. Well, no. The deal should stand on its own and be competitive without leverage at all. And then you decide whether you’re going to lever it up or not. I mean, most people do. But if just straight paying 100% equity for the deal, and its yield is 4, 5% I wouldn’t touch it. In my view, you should look for 9, 10% and they’re hard to find.

Scott: No, I would agree. I think that there’s a interesting risk in the commercial real estate market right now where cap rates are extremely low and interest rates are extremely low. So what happens if both of those things begin ticking up? Right? Which, that is speculation, as we mentioned earlier. But that’s going to really put a lot of… It seems like that risk is increasing. It can’t go down much further it seems.

David: No, I agree. I invested-

Scott: I guess it could.

David: No, a couple years ago there was a friend. A guy I knew. I got to know him. He was doing a student-housing project. I bought a share in his deal and he died like within a year. There wasn’t a real good… There was no succession plan, which is why I didn’t put that much money into it.
But another project team came over and they started doing these worst-case scenarios. I’m looking at their worst-case scenario, was that cap rates would go to 7%. And I say, “Well, what if they go to 8%?” And he’s like, “Well, it’ll never go to 8.” Well, they’ve been 8, 6 years ago. And he realized that no, they’ll lose money. Because as the cap rate goes up, the value of the property’s going to go down and they would have a hard time selling it.
So yeah, I think you’re right to be very aware of cap rates and interest rates because it does impact.

Scott: Well, we can go all day about commercial real estate markets. I think that there’s a lot of risk there and you got to know what you’re doing, which is why you should listen to the BiggerPockets Real Estate Podcast. For the commercial real estate side of things, especially.
Could you just maybe walk me through quickly that list of 12 asset classes that you’re in, so that we can get an idea for that? We’ve got bonds, real estate, stocks, REITs.

David: I don’t have all 12 in front of me, but I can name some other ones. Something that I’ve invested in this year is preferred stock.
So, preferred stock differs from common stock because preferred stock has a promise dividend. Payment. Typically, they’re yielding 5 to 6%. So, they yield more than REITs. A preferred stock doesn’t ever expire, so they’re like a very long-term bond. And so, they’re much more sensitive to interest rates.
In this environment, when the Federal Reserve suggesting they’re going to start cutting rates, I didn’t want to buy… We talk about speculation, right? I don’t want to buy long-term bonds, because I think rates are going to fall. Maybe they will. Because you only get, like I said, a two-and-a-half percent yield. But I’ll buy an asset class if I’m getting a 6% yield. I’m collecting that income and if rates fall, the value of that’s going to go up. That’s an example of an asset class.

Mindy: Before we move onto the next one, how do you buy preferred stock versus common stock?

David: They trade on an exchange. There’s preferred stock exchange traded funds, and you can buy a preferred stock index fund. I made an exception this time, because I bought… The challenge with preferred stock is most of the issuers are banks. If you’re buying an ETF or index fund, it’s going to be mostly banks. I actually bought the preferred stock of…
I mentioned these closed-end funds. So, these closed and mutual funds, they also are leveraged up. They’ve issued some preferred stocks. But I knew the company and well, I was comfortable there.
Because again, with this preferred stock, I’m not having to predict the future. I’m not saying this company is priced wrong. I’m saying they’ve issued a security that pays a 6% dividend. I know my risk is if the actual closed-end fund falls 50%, they might suspend the dividend for a while. But then they have to catch it up. You always have to look at what’s the downside to an investment.
So, preferred stock’s an asset class I’ve bought recently. I’ve bought mortgaged REITs. We’ve talked about equity REITs, where they actually own the real estate property. Where there’s something called mortgage REITs, where they’re actually buying mortgage-backed security bonds and then leveraging them up. We won’t want to go into a lot of detail.
There are all these little niche asset classes that most people don’t have to necessarily invest in. You’re fine. You want to do stocks, some cash, and maybe you want to do real estate. Some REITs. Bonds. That’s all you need.
But I like investing, so instead of learning how to buy individual stocks, I’d rather focus on different asset classes. That’s what I teach, anyway. That’s what I spend time doing.

Mindy: So-

Scott: Do you do any investing in private assets?

David: I do. My old firm, we launched a number of private funds. They’re called fund of funds. I’m in venture capital. I’m in leverage buyout funds. They have some farm loans. They have energy. Things like that. I’m not picking individual private deals, per se. Other than occasional real estate type thing.
But I do think once you have sufficient assets, it’s helpful to have things that aren’t tied to the financial markets. Own some land. Right? Or own some REITs. If you don’t want to manage real estate, we own some… Just some land. I mean, if you own some farmland, even if you don’t want to lease it out. Right? Tax is really low. You just have something as kind of a store value.

Scott: One of the things I think is interesting is your first thing is, what is it? Can you explain what you’re investing in to a friend, or to someone? Whatever. I think that a way to get around that is, again, to go to these index fund investments, these very broad asset classes that get the average return of a given asset class into your portfolio.
But the exception, you made this exception yourself, when the preferred stock fund that you’re investing in seems to be in those very few areas where each of us seems to have an individual competitive advantage in understanding things, or company preferred stock. If you know that there’s a reasonable risk behind that and you can explain what’s going on there.
Or I know some folks that are high net worth individuals here in Denver who are able to source deals that they can invest in. Basically, as private equity partners or angel investors. I think they’re not excluded by your philosophy here. But again, it’s like that very big selection with a portion of your investment portfolio in perhaps these private things that you can really understand and articulate very well. Would you agree with that?

David: No, I agree with that. Yeah. I mean, my stage, I have about 40% of my assets in private stuff. Maybe 10%’s in the private equity venture capital, but a lot of it’s these direct deals where I’ve lent… Asset-based lending is what I call it. Where there’s an asset, I’ve done lending on it.
You need to understand whether do you have an expertise? Right? And start small. Always look at what’s the worst-case scenario. How much could I lose? With speculations, Bitcoin for example, the baseline assumption, you could lose it all. You want to keep those speculations very, very small.

Mindy: I’m not a huge Bitcoin fan. Or Bitcoin fan, at all. But I also cannot explain it, which is why I don’t invest in it at all. What makes Bitcoin a speculation rather than a gamble in your mind?

David: Well, a gamble is something that has a negative expected return. You know over time you’re going to lose money on it. Whereas, it’s not completely clear whether with Bitcoin… Bitcoin, if people trust it, then it will probably do fine over time. It’s volatile as heck, but there’s not an embedded loss.
An example of an as an asset, for example, that has a negative expected return is binary options. They’re an option contract where you pay a premium, and if things work out, you make $100. If you don’t, you lose it. Basically, you lose your premium.
Well, a lot binary options trade on exchange. There’s another individual on the other side. But many trade on, you’re just trading with another firm. Right?
It’s like going to a casino. A casino has a negative expected return because if there was a positive expected return, the casino would go out of business. If you’re trading binary options with a private exchange and that’s who you’re trading with, that exchange, you know it has a negative expected return because otherwise they’d be out of business if it was positive. Because they have to have a positive expected return.
That’s why it’s always important to look at who am I trading with? What’s their motivation? What information or insight do I have that suggests that I can earn more than they did? Or more than the market.

Scott: Man, you’re just going to crush so many folks’ egos who invest in these little niche things. Like, “Hey, I’m investing in gold. Or I’m investing in binary options.” Or whatever. Oh, this is going to… You know.

David: I own gold. But it’s classifying it, right? I own gold coins, and gold ETFs, but I know that it’s a speculation. That I had to be precisely right that 10 years from now people are going to want gold more than they do today.
I mean, but there’s people that take their entire retirement and had put it in gold, or Bitcoin, and that’s crazy. Because you want the workhorse of your portfolio should be the income being generated from an asset class so that cashflow is growing over time.

Scott: I could not agree more with that statement. I have a little bit of a reputation for trashing gold a little bit. Not because I don’t… I think it will rise with inflation over time, more or less. It could even be better than a currency. I just feel like long-term, and this is a bias perhaps to my personal investing and life situation, long-term return of holding gold, for me, I think would result in less wealth than putting that equivalent amount in a stock index fund. Even though I know I might have more volatility or whatever over the long-term.

David: Well, it probably will. Right? You own gold because it’s an option against uncertainty. It’s how Jim Grant puts it, right? That everything’s going to fall apart, right? I own gold because… I keep it in a safe deposit box somewhere and… Just in case. Right? I mean, I don’t know.
But over time, you’ll probably not beat the stock market because there’s no income to it. If it beats it… I don’t want it to beat the stock market. Because if it does, that means life is not going to be good for us because something is very, very wrong.

Mindy: I agree with Scott, except I don’t own any gold. Gold hasn’t really risen in price over the last… I mean, it’s like stayed the same with little ups and downs. Right? It’s more-

David: Yeah, it’s had a six year high this year.

Mindy: Is it?

David: Yeah. Gold does well when there’s unexpected inflation. Or when there’s huge geopolitical risk. We won’t get into how the monetary system works, but money’s essentially worthless. Right? I mean, it’s not backed by anything.
So there’s the idea, here’s a chunk of rock that people have valued for millennia and if suddenly people lose trust in central banks, in all currency, what are they going to go to? They’re going to gravitate towards things that are real. That could be land. Could be real estate. But it’s kind of hard to carry around land. But you can carry around gold.
Maybe it’ll be Bitcoin. Maybe people will trust these digits of Bitcoin. I mean, they definitely use it in Venezuela right now. You have super high inflation, people store their wealth in Bitcoin because they can quickly switch it over to the Venezuelan currency and buy something because prices are rising to very, very high.

Scott: I recently had a debate on the BiggerPockets forum with a user who was claiming to have discovered a new way to cashflow gold, which I disagreed with. It was basically sell calls at a certain point. Buy gold, sell calls, and you’ll get the income from the calls, unless… I was like, “Well, if gold goes down, based on the ways this is working, it’s not going to work.” Anyways, I won’t go into-

David: I wouldn’t know. I wouldn’t do that.

Scott: I was not happy with the strategy. Basically, I looked at it and it was like, gold is actually remarkably volatile asset. It’s gone up and down over the last hundred years, by four, five, six times a couple of times at various points. Like early 19-

David: Oh, it has. It has. Or there were times where you weren’t allowed to own gold. Where they froze the price and they confiscated gold. It’s a controversial asset. I have about 4% in gold. Another 2% cryptocurrency. I put it away and ignore it.

Scott: Fair enough.

David: Because if it does well and you don’t own any, you’ll feel bad.

Mindy: Okay, that is a good point. I don’t own Bitcoin because I don’t understand it at all, but I remember when Greece and… Was it Greece and Italy? Greece was having its horrible currency issues and that was when Bitcoin had gone up to the previous high. It was like six thousand dollars for a Bitcoin, I think. People from Greece would put their money in Bitcoin and then, like you said with the Venezuela, pull it out to buy something and put it back because it was a more, or less volatile currency than their own currency.
But as it’s going up, you’re like, “Aw, man. Remember when it was a thousand dollars three weeks ago? I wish I would have gotten in then.” And I was just telling myself, “Yeah, but it could easily be you buy it at a thousand and it goes down to twenty.”

David: I mean, right. That’s why it’s a speculation. It’s sort of minimizing your maximum regret. The idea that I’m going to feel bad if… My wife Lopearl is like, “Why didn’t you sell Bitcoin when it got up to nineteen thousand?” Well one, I didn’t know it was going to fall. I knew it was probably a bubble. But I would’ve felt bad had it kept going up. It went down and cut by half.
I didn’t feel bad because I already had set my allocation. I knew I bought this, I’m going to hold it for 20 years and see how it works. And so, I don’t want to. If you have something that’s not a big part of your portfolio, there’s no reason to sell it.
But it depends on how your mind’s made up. I feel bad missing out on something than I would taking my profits. She would say, “Just take the profits and go buy a piece of land.” Whereas I would feel bad selling and then know it doubled or tripled.

Scott: That’s interesting because I feel bad… At least, I’m trying to train myself this way. It doesn’t always work out this way in practice. But I feel bad when I feel that my decision wasn’t based on the best mathematical case for the long run for my investing portfolio.
I think that, in reality, I’m more like you where I’d be upset if I missed out on a good bet even if it didn’t fit fully in with my like, oh long-term I think the stocks will beat gold or Bitcoin or whatever.
I think there’s actually some really great stuff here for this discussion. I have to go home and think about and figure out if I’m going to change any of my-

David: But no, I think you’re right. In fact, Annie Duke, I talk about this in my book, she talks about a good decision is not the result of a good outcome. Whether the outcome is positive or negative, that isn’t what makes a good investment decision. It’s whether you had a good process for making that. Right?
So you have a good process. I mean, you’re looking at this the right way. What is the driver of the stock market? Okay, if I see what drives return the stock market, the dividend, the income growth, et cetera, that’s a better foundation than buying gold where the return driver is people paying more in the future. I mean, between the two, you buy stocks. You buy gold in case the world falls apart. But not too much.

Scott: We’ll have to go look it up, but we actually interviewed Annie Duke on the BiggerPockets Real Estate Podcasts. She’s one of my favorite authors, so I’ll plug her book, Thinking in Bets, right here on the show. Go check that out. It’s one of my favorite reads I’ve read in the last couple of years. Non-BiggerPockets reads, of course.
And then I’m also dabbling a little bit in poker as a result of what she’s been talking about, which I classify, according to your schema here, as gambling. Appropriately.

David: Oh no, she’s delightful. She actually endorsed my book, so she’s on the front cover, endorsing my book as a very good investment decision process.

Scott: Fantastic. That’s a stellar recommendation right there.

Mindy: And the Annie Duke episode is episode 297 of the BiggerPockets Real Estate Investing Podcast, which can be found at biggerpockets.com/show297.
Okay, David, it appears that we have come to that time. The Famous Four. These are the same five questions that we ask all of our guests. Are you ready?

David: I am ready. I don’t remember the fifth question. You said five.

Scott: Four questions-

Mindy: It’s four questions and a command.

Scott: Yeah.

David: Okay.

Mindy: Sort of. What is your favorite finance book?

David: My favorite book is Antifragile from Nassim Nicholas Taleb. Now, he’s a difficult read, but I like him because he’s really changed the way I think about investing ever since his first book comes out.
The biggest take-away from that book is ruin matters. He says he’s effectively organized his life that sequence matters. And the fact that when we do things, why we do things, and if there’s a chance of being ruined in a particular deal, such as putting all your money in Bitcoin or gold, you don’t do it. We need to always avoid ruin to make sure that we live another day.

Scott: That sounds awesome. I’ve not heard of that book. I’m going to have to go check it out. What is your biggest money mistake?

David: Well, my most recent money mistake is one of my biggest. We’ve bought a lot of used cars in the past, and three years ago I bought a BMW 650i, I talked about it on my podcast, because it was a fast car. It would be fun. I thought, “You know what, it’s already taken a 50% depreciation hit. It’ll be great.”
I just traded it in for a Prius. Because one, I’ve got sold a lemon. Two, the price dropped like a rock. I ended up spending… I threw out twenty-eight thousand miles. It’s been a dollar twenty-five a mile on that, which is about twice what I’ve ever spent on a car on a per-mile basis.
So, that’s the biggest money mistake I’ve made recently.

Scott: Here’s why I love this mistake so much. You have articulated out exactly how much money you’ve lost on a per-mile basis in great detail. Right? Who categorizes that level of detail around a mistake? I mean, that’s got to be a contributor to the reason why you’ve been so successful with money over a long period of time.

David: Yes because I like to know what am I paying? We’ve done this with all our cars. Our typical car, our Honda Odyssey, we drove it a hundred-and-sixty thousand miles. We ended up, you know, it was like 20 cents a mile.
When I have a car that’s suddenly costing me a dollar 25 a mile, and yeah it stings. Yeah, I calculated it. I mean, I felt bad trading it in on the Prius because my daughter will drive that in college and people say it’s my car. I say, “It’s not really my car.” I don’t have a car. I messed up on my car. I don’t get a car for a while. Not even the Tesla I test drove. We won’t get that one.
I even factored that one in. Leasing a Tesla, a Model 3, will run about 83 cents a mile. They’re cheaper than this used BMW that I lost money on.

Mindy: Wow. So, Scott you are asking him, “Wow, who does this? Who calculates it out by the mile?” I did. Did you not? Because you’re just as much of a money nerd as-

Scott: I have not done that, so. But I do think that my car is probably one of my bigger financial mistakes. It was a little bit lower scale. I bought a new Toyota Corolla and I probably should have bought a five or seven-year-old model when I first started out. I would have been up ten or twelve grand.

Mindy: Yeah, but still. As far as money mistakes go, I mean, there’s some whoppers out there.

Scott: Because I now drive a five-year-old Toyota Corolla, 2014, I feel like if I were to compute my cost per mile, it’s got to be in the lower end of the spectrum, so maybe that’s why I haven’t done that.

David: I’m sure it is. How many miles you have on that?

Scott: Oh, like thirty thousand.

David: Thirty? Oh, you’re priced still up there. You’ve got a whole lot longer. You’ll get down into thirty cents a mile. That includes gas and insurance, too.

Scott: If you’re interested in diving deeper into this, listeners, on the discussion around the nuts and bolts on this, I’m sure, David, you have a lot on your website, your podcast.
But Mr. Money Mustache has also done an interesting study that kind of resonated with me around how if you buy a new car, you’re basically purchasing 20 years of car inventory. Which is a really inefficient way to build a business, for example. There’s a lot of mathematical concepts that kind of derive from that that helps make the case very strong for used vehicles and those types of things when you’re making a decision around this.

Mindy: Is this the new cars and auto financing article?

Scott: I don’t know. I’ll find it and I’ll link it to you.

Mindy: Yeah, we’ll put those in the show notes which can be found at biggerpockets.com/moneyshow86. Okay. David, back to the actual show. What is your best piece of advice for people who are just starting out?

David: Well, this is what we talked about in this episode. Whenever you’re starting out, ask what is it? Be able to explain what the investment is and how it’s going to make money. Even if it’s just the option within your 401k. Understand what it is before you invest.

Scott: All right. What is your favorite joke to tell at parties? This is the hardest question of the Famous Four.

David: Yeah, it actually is. I’ll tell you. Let’s see. I hear this is a popular joke. You let me know if people have told it before. So there are two muffins in the oven… You know the punchline yet?

Mindy: No.

David: All right. Two muffins in a oven. The one says to the other, “Ah, it’s getting hot in here.” And the other says, “Eeh, a talking muffin.”

Scott: Ah, nice. You’re definitely going to get a rise out of the audience with that one.

Mindy: Oh god, Scott. Okay. David, here’s the command. Tell me where people can find out more about you. Please.

David: Oh, yeah. My website’s moneyfortherestofus.com, so that’s where you can find out there. My book that’s coming out is, basically it goes through 10 questions you should ask any time you want to invest. It’s Money For the Rest of Us: 10 Questions to Master Successful Investing. You can find more information on that at moneyfortherestofusbook.com.

Scott: When does that book come out?

David: October. October 25th, 2019.

Scott: October, awesome.

Mindy: Awesome. And you can pre-order the book moneyfortherestofusbook.com. We’ll link to those in the show notes as well. Again, the show notes for this show can be found at biggerpockets.com/moneyshow86. Okay.

Scott: That book’s coming out in October, you said?

Mindy: That book comes out October 25th.

Scott: Okay.

Mindy: Awesome. David, thank you so much for being on the show today. I really appreciate your time. This was really informative. All these different ideas. And principle number one, be able to describe what you’re investing in. I hear a lot of people in… On Facebook, I see people saying, “Oh, I just bought X.” I’m like, “Why did you buy that? That seems like something you heard.”
I’m going to start asking people, actually, can you explain what this is? And see what they say. That’s a really good indicator of do you even have the knowledge to be putting money into this? You can lose everything if you don’t know what you’re doing. I really like that idea.

Scott: Yeah.

David: Well, you know, the challenge is, is that idea, we don’t think of about losing everything, right? When we buy something, all we can think about is that feeling what’s it going to feel like when it goes up.

Mindy: Oh, yeah. I’ve gotten-

David: [inaudible 01:04:44]at the process. Just thinking it’s going to go up makes us feel like we know more than we do.

Mindy: I’ve won the lottery about a thousand times in my head. Every time it goes up really high, I buy one ticket and then I don’t win and I’m always surprised.

David: But you do it for the entertainment values, right? Lotteries are gambles, and the only reason you gamble is for entertainment. But you don’t want to be entertained by losing money on your investing. You do that for gambling, or you go to Las Vegas.

Mindy: Yeah, and I don’t really gamble that much. My in-laws live in Las Vegas. I’m there a lot. I’m there a real lot for somebody who doesn’t gamble. But yeah, I never buy a stock, buy a index fund, invest in real estate, thinking, “I hope I lose everything.”

David: No, but the entertaining… This is the lottery, right? You get more satisfaction out of the thought of winning. What you get out of that is worth more than the price of the ticket. Otherwise you wouldn’t do it, right? The thought of, “That I could win,” is worth more to you than the amount that you know you could lose buying the ticket.

Mindy: The dollar. Oh, I couldn’t buy like five lottery tickets. Are they $2 now? That’s like $10. I can’t put $10 dollars in there. I don’t want to lose $10. But I’ll lose a $2.
Okay, this is David from Money For the Rest of Us. We’re out of here. Thank you, David, for your time today.

David: Thanks for having me.

Scott: All right, that was David from Money For the Rest of Us. Wow. What a great discussion. What insightful commentary. What’s some great rules for investing. A whole bunch of new asset classes to think about and explore if you’re like me and were kind of new to some of those things, but thought you were getting a pretty good grip on maybe real estate stock investing and bond investing.

Mindy: Yeah. His number one principle, be able to describe in detail what you’re investing in is like it’s so simple, but it’s so mind-blowing. If you can’t explain it, then you should not be investing in it. Not until you can explain it.
Bitcoin, I have no idea what it is. I mean, I know what it is. But I don’t know how it works. I don’t understand it. Frankly, I don’t care. I don’t want to invest in Bitcoin. It’s very volatile. It’s too volatile for me, so I don’t invest in it. But there’s a lot of other people that I know who are investing in it and I know they don’t know what they’re talking about. That just makes me a little scared for their experience coming up.
But that right there is the number one tip we can take from this is, be able to describe what you’re investing. And like you said, he gave us a lot of different new to you ideas and new investment classes that you can go and research and figure out, “Hey, is this something I want to do? Is this not something I want to do?” But I love this episode because it just introduces some new things that we haven’t talked about before.

Scott: Yup. I’ll say that I feel like I have a reasonable understanding of Bitcoin. What it is. How it’s used. I feel like that is why I do not invest in Bitcoin.
To go on my once every six month tirade against Bitcoin. Bitcoin is one of hundreds of cryptocurrencies, right? Which are used leveraging a technology called the blockchain. The blockchain is a very valuable technology that has a lot of applications and a lot of business things. Bitcoin itself is one of hundreds of fabricated, theoretical currencies that you can apply value to.
For example, Target… Not Target. Kodak created a Kodak coin a few years back, or maybe last year, that was a new cryptocurrency that could have been just exactly like Bitcoin. But they were more specifically for photography-related purposes. But the currencies themselves have no intrinsic value except in how individuals trust them as currencies.
Though there could well be a cryptocurrency like Bitcoin, or Ethereum, or one of these other currencies, that’s a leader one day that takes over a large portion of international trade. But who’s to say it will be Bitcoin, or Ethereum, or a new one that doesn’t exist yet. Right? It’s going to be one of those that’s going to attract, in my opinion, most of the market share. I have no reason to suspect that Bitcoin would be it if that ever exists in the first place.
As a United States citizen, if you tried to pay me in Bitcoin, I’m going to refuse you and I’m going to ask you for dollars. For now, practical application for Bitcoin. I see a really long-shot odds of any one specific currency actually becoming a defacto world currency that’s used to a great extent. Could be wrong on that, but that’s my understanding of Bitcoin. That’s why I do not invest in Bitcoin.

Mindy: And you do make a good point. I use Bitcoin interchangeably with cryptocurrency. It’s just easier to say Bitcoin than cryptocurrency. I think most people when they’re talking about Bitcoin, they actually mean cryptocurrency in general. Either way, I don’t invest in any of it because I don’t understand it.

Scott: I was going to invest in cryptocurrency. Or speculate, as we should say. I would try to do it in an index fund of cryptocurrencies to de-risk that concept I just talked about of Bitcoin maybe not being the one that wins out in the end. Maybe it’s Ethereum. Or maybe it’s one that hasn’t been invented yet. Or one of the hundreds or thousands of small ones that have value currently at close to zero and aggregate. But you just don’t know. I think there’s a lot of challenges around that.
Tirade against Bitcoin over. Tirade against gold happened today. There you have it.

Mindy: Yeah, I’m not a big fan of gold, either. I thought that I had read somewhere that gold has hovered around like twelve-hundred or fifteen-hundred dollars an ounce. I remember in the ’80s it was also like twelve or fifteen-hundred dollars an ounce. I am just going on memory, though, so please if I’m wrong, don’t send me 3000 emails telling me how wrong I am. You can send them to Scott instead.
Okay, Scott should we-

Scott: M-I-N-D-Y at biggerpockets.com. All right. Well, should we get out here, Mindy?

Mindy: We should. From episode 86 of the BiggerPockets Money Podcast, I am Mindy Jensen, he is Scott Trench, and I don’t have snappy comeback today, so goodbye.

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They rarely do anything like this but they’re doing it just for us!

In This Episode We Cover:

  • David’s money journey
  • Launched businesses at a very young age
  • Studied and liked the aspect of finance
  • How he approached money throughout his career
  • What prompted him to retire
  • His investment principles
  • Disadvantages of buying individual stocks
  • The difference between investment, speculation, and gambling
  • Individual stocks versus index funds
  • Any circumstances that would make people buy an individual stock
  • The reason why he started the podcast
  • Closed-end mutual funds
  • Bonds
  • On real estate investment trusts
  • How he selects REITs
  • Private REITs vs. public REITs
  • On preferred stock
  • Buying preferred stock vs. common stock
  • What a mortgage REIT is
  • On bitcoin
  • What makes bitcoin speculation rather than a gamble
  • And SO much more!

Links from the Show

Books Mentioned in this Show

Tweetable Topics:

  • “I could solve this problem in my life and not wait for somebody else to solve it.” (Tweet This!)
  • “You do it, maybe for fun. Sometimes you have to learn by doing and realize how hard it is.” (Tweet This!)
  • “Start small and always look at what’s the worst case scenario.” (Tweet This!)
  • “A good decision is not the result of a good outcome.” (Tweet This!)

Connect with David

The BiggerPockets Money Podcast is for anyone who has money… or want to have more! Join BiggerPockets Community Manager and Podcast Director Mindy Jensen and CEO Scott Trench weekly for the BiggerP...
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